7/17/2019 nycirc_1980_08871.pdf http://slidepdf.com/reader/full/nycirc198008871pdf 1/7 FEDERAL RESERVE BANK OF NEW YORK r Circular No. 88711 L July 11, 1980 J RESTITUTION UNDER THE TRUTH IN LENDING ACT Policy Guide For Restitution To All Member Banks, and Others Concerned,in the Second Federal Reserve District: Enclosed is a copy of a “Policy Guide for Restitution under the Truth in Lending A ct/’ adopted by the Board of Governors of the Federal Reserve System, that explains the conditions under which reimbursement by State member banks to borrowers must be made when the annual percentage rate or finance charge required to be disclosed under the Tru th in Lending Act has been understated. The following is quoted from the tex t of a statement issued by the Board of Governors, announcing the adoption of the Policy Guide: The Policy Guide was developed by the Board, and other agencies represented on the Federal Financial Institutions Examination Council, to embody the requirements of a section of the Truth in Lending Simplifica tion Act.1 In general, restitution is required under the Simplification Act when the understatement of the cost of borrowing is part of a clear and consistent pattern or practice of violations, or results from gross negligence or from willful violation intended to mislead the person to whom the credit was extended. The restitution requirements of the Act apply to all types of credit subject to Truth in Lending dis closures. However, there are certain special rules applying to mortgage transactions involving irregular payments. The Simplification Act provides that existing open-end and closed-end transactions in which the APR or finance charge was understated will be subject to adjustment according to different time frames, going back in some cases as far as July 1, 1969 (see Corrective Action in the [ enclosed ] Policy Guide). Where the amount of an adjustm ent would be less than $1, no restitution to the consumer would be required, but in such cases outstanding for more than a year after the violation, payments to the U.S. Treasury may be ordered. A uniform interagency plan will be developed within the Examination Council for implementing the restitution provisions. Institutions identified as having reimbursable violations under Regulation Z Enforcement Guidelines that were developed by the agencies last year will be examined by the agencies within a year, to deter mine if restitution is necessary under the new policy. 1Title VI of the Depository Institutions Deregulation and Monetary Control Act of 1980 Additional copies of the Policy Guide will be furnished upon request. Questions regarding the Board’s restitution policy may be directed to our Consumer Affairs and Bank Regulations Department (Tel. No. 212-791-5914). A nthony M. S olomon , P r e s i d e n t .
RE S T I T UT I ON UNDE R T HE T RUT H I N L E NDI NG ACT
Policy Guide For Restitution
To All Member Banks, and Others Concerned,
in the Second Federal Reserve District:
Enclosed is a copy of a “Policy Guide for Restitution under the Truth in Lending A ct/ ’
adopted by the Board of Governors of the Federal Reserve System, that explains the conditionsunder which reimbursement by State member banks to borrowers must be made when the annual
percentage rate or finance charge required to be disclosed under the Truth in Lending Act has
been understated. The following is quoted from the text of a statement issued by the Board ofGovernors, announcing the adoption of the Policy Guide:
The Policy Guide was developed by the Board, and other agencies represented on the Federal Financial
Institutions Examination Council, to embody the requirements of a section of the Truth in Lending Simplifica
tion Act.1
In general, restitut ion is required under the Simplification Act when the understatement of the cost of
borrowing is pa rt of a clear and consistent pa tte rn or practice of violations, or results from gross negligence
or from willful violation intended to mislead the person to whom the credit was extended.
The restitution requirements of the Act apply to all types of credit subject to Truth in Lending dis
closures. However, there are certain special rules applying to mortgage transactions involving irregular
payments.
The Simplification Act provides that existing open-end and closed-end transactions in which the APR or
finance charge was understated will be subject to adjustment according to different time frames, going back in
some cases as far as July 1, 1969 (see Corrective Action in the [enclosed ] Policy Guide).
Where the amount of an adjustm ent would be less than $1, no restitution to the consumer would be
required, but in such cases outstanding for more than a year after the violation, payments to the U.S. Treasury
may be ordered.
A uniform interagency plan will be developed within the Examination Council for implementing the
restitution provisions. Institutions identified as having reimbursable violations under Regulation Z Enforcement
Guidelines that were developed by the agencies last year will be examined by the agencies within a year, to deter
mine if restitution is necessary under the new policy.
1Title VI of the Depository Institutions Deregulation and Monetary Control Act of 1980
Additional copies of the Policy Guide will be furnished upon request. Questions regarding the
Board’s restitution policy may be directed to our Consumer Affairs and Bank RegulationsDepartment (Tel. No. 212-791-5914).
POL ICY GU ID E FOR R E ST IT U T ION U N D E R T HE T R U T H IN L E N D IN G A C T
ADMINISTRATIVE ENFORCEMENT OF THE TRUTH IN LENDING ACT - RESTITUTION
The Depository Institutions Deregulation and Monetary Control Act
of 1980 (P. L. 96-221), was enacted on March 31, 1980. T itle VI of that
Act, the Truth in Lending S im plification and Reform Act, amends the Truth
in Lending Act, 15 U.S .C.§ § 1601 et seq. Section 608 of T it le VI, effec tive
March 31, 1980, authorizes the Federal Truth in Lending enforcement agencies to order creditors to make monetary and other adjustments to the accounts
of consumers in cases where an annual percentage rate or finance charge was inaccurately disclosed. It generally requires the agencies to order re sti tution when such disclosure errors resulted from a clear and consistent
pattern or practice of vio lat ion s, gross negligence, or a w illfu l viola tion
which was intended to mislead the person to whom the credit was extended.
However, the Act does not preclude the agencies from ordering restitution
for isolated disclosure errors.
This policy guide summarizes and explains the restitution provisions
of the Truth in Lending Act, as amended. The material also explains corrective
actions the financial regulatory agencies believe will be appropriate and
generally intend to take in those situations in which the Act gives the
agencies the authority to take equitable remedial action.
The agencies anticipate that most financial ins titu tions w ill
voluntarily comply with the restitution provisions of § 608 as part of the
normal regulatory process. I f a creditor does not vo luntar ily act to correct
vio lations, the agencies w ill use their cease and desis t authority to require
correction pursuant to: 15 U.S.C. § 1607 and 12 U.S.C. § 1818(b) in thecases of the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, and the Office of the Comptroller of the Currency; 15 U.S.C. § 1607 and 12 U.S.C. §§ 1464(d)(2) and 1730(e) in the
case of the Federal Home Loan Bank Board; and, 15 U.S.C. § 1607 and 12 U.S.C.§ 1786(e)(1) in the case of the National Credit Union Adm inistration.
Except as provided below, all definitions are those found in the Truth inLending Act ("Act") and Regulation Z, 12 CFR Part 226.
1. "Current Examination" means the most recent examination begun on or afte r
March 31, 1980, in which compliance with Regulation Z was reviewed.
2. "Irregula r Mortgage Transaction" means a loan secured by real estate for
which the annual percentage rate (APR) cannot be ca lculated using Volume 1of the Federal Reserve System's Truth in Lending, Regulation Z, Annual Percentage Rate Tables.
3. "Lump Sum Method" means a method of reimbursement in which a cash payment
equal to the tota l adjustment w il l be made to a consumer.
4. "Lump Sum/Payment Reduction Method" means a method of reimbursement in
which the tota l adjustment to a consumer w il l be made in two stages:
a) a cash payment that fu ll y adjusts the consumer's account up to
the time of the cash payment; and,
b) a reduction of the remaining payment amounts on the loan.
5. "Understated APR" means:
a. For other than irre gu lar mortgage transaction s, a disclosed APR which, when increased by one-quarter of one percentage point, is
less than the actual APR calculated under the Act, without taking
into account the tolerance provided by section 107(c) of that Act.
b. For irre gular mortgage transactions consummated before April 1, 1981, a disclosed APR which is less than the actual APR calculated under section 107(c) of the Act, including a one-half of one percentage point
tolerance.
c. For ir regula r mortgage transact ions consummated after March 31, 1981,
but before April 1, 1982, a disclosed APR which, when increased by
one-quarter of one percentage point (instead of one-half of one
percentage point), is less than the actual APR calculated under the
Act, without taking into account the tolerance provided by section
107(c) of that Act.
d. For a ll loans consummated after March 31, 1982 (in clud ing irregu lar
mortgage transactions), which have an amortization schedule of 10
years or less, a disclosed APR which, when increased by one-quarter
of one percentage point, is less than the actual APR calculated under the Act, without taking into account the tolerance provided by
e. For a ll loans consummated after March 31, 1982 (in clud ing irregular
mortgage transactions), which have an amortization schedule of more
than 10 years, a disclosed APR which is less than the actual APR,
including the tolerance contained in section 107(c).
f. For a ll loans determined to contain a w il lfu l vio latio n intended to
mislead a consumer, a disclosed APR which is less than the actual APR including the tolerance contained in section 107(c).
6. "Understated Finance Charge" means a disc losed finance charge which, when
increased by a numerical tolerance that is generated by the corresponding
APR tolerance, 1/ is less than the finance charge calculated under the Act.
De Minimis RuleI f the amount of adjustment on an account i s le ss than $1.00, no
re stitu tion will be ordered. However, the agencies may require a creditor to
make any adjustments of less than $1.00 by paying into the United States
Treasury, if more than one year has elapsed since the date of the violation.
Corrective Action Period
1. Open-end credit transactions will be subject to an adjustment i f the
violation occurred within the two-year period preceding the date of the
current examination.
2. Closed-end cred it transactions w ill be subject to an adjustment i f the
violation resulted from a clear and consistent pattern or practice or
gross negligence where:
a. There is an understated APR on a loan which originated between
January 1, 1977 and March 31, 1980.
b. There is an understated APR or understated finance charge, and
the practice giving rise to the violation is identified duringa current examination. Loans contain ing the vio la tion which were
consummated since the date of the immediately preceding examination
are subject to an adjustment.
1/ Finance charge tolerance: the finance charge tolerance for each loan w illbe generated by the corresponding APR tolerance applicable to that loan.For example, consider a single-payment loan with a one-year maturity which
is subject to a one-quarter of one percent APR tolerance. I f the amount
financed is $5,000 and the finance charge is $912.50, the APR w il l be
18.25%. The finance charge generated by the APR of 18% on that loan would
be $900. The difference between $912.50 and $900 produces a numerical finance charge tolerance of $12.50. I f the disc losed finance charge is not understated by more than $12.50, reimbursement would not be ordered.
Violations Involving the Improper Disclosure of Credit Life, Accident, Health, or Loss of Income Insurance
1. Through March 31, 1982:
a. I f the cred ito r has not disclosed to the consumer in writing that
cred it lif e , accident, health, or los s of income insurance is optional, the insurance shall be treated as having been required and improperly
excluded from the finance charge. An adjustment w ill be ordered if it re su lts in an understated APR or understated finance charge. The
insurance w ill remain in effect for the remainder of i t s term.
b. I f the cred itor has disclosed to the consumer in writing that cred it
li fe , accident, health, or loss o f income insurance is optional, but there is either no signed insurance option or no disclosure of the
cost of the insurance, the creditor shall, unless a claim was made on
the insurance policy and paid, be required to send a written notice
to the affected consumer disclosing the cost of the insurance and
notifying the consumer that the insurance is optional and may be cancelled within 45 days to obtain a fu ll refund of a ll premiums charged.I f the credito r receives no response from the consumer within 45 days, the insurance will remain in effect and no further corrective action,
with respect to that loan, w ill be required.
2. After March 31, 1982, the above vio la tions of section 106(b) of the Act w ill be treated as APR or finance charge violations for adjustment purposes, as
applicable.
Special Disclosures
Adjustments w ill not be required for vio lat ions invo lving the d is closures required by sections 106(c) and (d) of the Act.
Obvious Errors
I f an APR was disclosed correc tly , but the finance charge required
to be disclosed was understated, or i f the finance charge was disc losed correctly but the APR required to be disclosed was understated, no adjustment
w ill be required i f the error involved a disc losed value which was 10 percent or less of the amount that should have been disclosed.
Agency Discretion
Adjustments w ill not be required i f the agency determines that the
disclosure error resulted from any unique circumstance involving a clearly
technical and non-substantive disclosure violation which did not adversely
affect information provided to the consumer and which did not mislead or
In connection with loans consummated before April 1, 1980, i f fu ll
adjustments would have a s ig n if ic an tly adverse impact upon the safety and soundness of the creditor, partial adjustments which do not have such an
impact may be required. In connection with loans consummated after March 31, 1980, fu ll adjustments w ill always be required. However, the affected credito r w ill be permitted to make the fu ll adjustment in part ia l payments over an extended period in order to minimize the adverse impact on its safety and
soundness.
Exemption from Restitution Orders
A creditor w il l not be subject to an order to make an adjustment i f within 60 days after d iscovering a disclosure error, whether pursuant to
a final written examination report or through the creditor's own procedures, the creditor notifies the person concerned of the error and adjusts the
account to ensure that such person wil l not be required to pay a finance
charge in excess of the finance charge actually disclosed or the dollar
equivalent of the APR disclosed, whichever 1s lower. This 60-day period
for correction of disclosure errors is unrelated to the provisions of f 130, Civil Liability, of the Truth in Lending Act.
